This Friday we will kick-off Q4 2021. It is usually the time of the year where companies should be finalising their annual budgets for 2022. However, I am amazed at the vast amount of businesses that do not bother with budgets. Many bring up the excuse that the minute the budget is concluded it is already wrong or outdated and that this is even more so in the present uncertain times. I beg to differ. What is needed is a different and more agile approach to budgeting.
What is this approach based upon?
1. Change the purpose of planning and budgeting. Most planning and budgeting systems are designed to help business owners or top managers predict, command and control. Predict precisely what the company must do to deliver smooth and stable trends in performance. Command each part of the business and make sure it functions well to execute detailed plans that will add up to the desired total. Then rigorously control activities within each silo to make sure people conform to plans and deliver required results. Even in more stable times, such an approach to budgeting leads to a result whereby predictability becomes an unachievable quest. Therefore the budgeting process should focus on achieving a higher performance, not for predicting them. More than all this, the predict, command, and control model is especially ineffective in periods of constant crises and black swan events like a pandemic. In a world of unpredictable and accelerating change, long-term forecasts will be increasingly unreliable and trying to stick to flawed plans will grow more dangerous. Hence the focus for any budgetary process is how to improve outcomes for customers, employees and business owners and less on hitting numbers. The focus should be on learning, adapting and growing — not on trying to predict the unpredictable.
2. Shift the focus from financial precision to strategic success. Typically, right around now, as the planning and budgeting season kicks off, the chief financial officer issues financial targets and spending guidelines. Later, when budget submissions finally roll in, it’s not uncommon for the total to be too high. At that point, the CFO does some financial analyses to prioritise investments and make painful cuts. On paper, it adds up to impressive returns. In reality, it seldom turns out that way. A better approach is to turn the targeted outcomes developed into strategic portfolio guidelines that drive the budgeting and adaptation process. These guidelines force discussions that allocate resources from the strategy down, rather than from individual projects up. Here are some typical questions strategic portfolio guidelines might raise:
What are the outcomes that will be most important for strategic success? In light of those priorities, where should resources go? For example, how much of our resources should go to running the business (operations) versus changing the business (innovations)? How much should go to various customer segments? How much should go to different sales and distribution channels, business units, brands or product lines? How much of our technology resources is properly spent on keeping current systems running versus developing new features or improving architecture? What hypotheses must be true for these resource allocation strategies to work, and how can we test them most quickly and efficiently?
When managers link individual investments with these strategic classifications and add them up, they often discover surprising patterns. Their greatest growth opportunity may actually turn out to be losing market share and investing little in innovation. The largest chunk of the technology budget may be going to simply keeping the lights on and fixing legacy systems whilst investment in the online channel preferred by customers may turn out to be woefully low. By properly aligning resources with strategic priorities, companies can better see the tough trade-offs that should be made but aren’t working — either because of neglect or because decisions are being made by the wrong people. This has only become more important in the current turbulence. Managers responsible for strategic outcomes should understand and then make the resource trade-offs to achieve them.
3. Plan faster and more frequently. If budgets are inflexible and can’t be adjusted, it is obvious that the whole budgetary process is going to focus over its accuracy. Left untouched, even small mistakes can compound over time and make a mess of plans. However, if we can adjust a long-term forecast every quarter, month, or week, we can continually improve its accuracy in far less time and with far less effort. Setting bold, challenging objectives and then adjusting plans to incorporate valuable lessons learned is the best way to improve.
For most companies, traditional planning and budgeting are either useless or, at the other end of the spectrum, offer a comfortable sense of certainty. In both cases, especially in current times, precision should not be the main focus of any budgeting, but the setting up of plans that are flexible enough to focus on what truly creates value – that is truly worth every effort!